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December 6, 2011

Inquiry lays Olympus blame on management

The investigation on the Japanese optical equipment company Olympus concluded that executives are responsible for the $1.7bn scandal cover up but aspects of auditors’ conduct were “not appropriate” and “questionable”.

KPMG ASZA was Olympus’s auditor until March 2009 and E&Y ShinNihon is the company’s current auditor.

The investigation over one of Japan’s largest corporate frauds by an independent panel questioned the audit procedure conducted by the two firms.

As for KPMG ASZA, the report admitted that “much of the unrealised loss was accrued in the off-balance sheet transactions such as derivatives” and it was then “extremely difficult” to detect it.

At the same time, the panel stressed that information handed over to the audit firm was “manipulated” and therefore “it was difficult to detect the overall picture” of the fraud.

Nevertheless, the independent panel criticised KPMG AZSA for allegedly not digging hard enough when inquiring on problematic aspects of the balance sheet and when the firm did not receive answers.

However, the report states the way Olympus presented the data made it “inevitable that such discovery was not made”.

The report also blamed auditors for having issued “an unqualified clean opinion without in depth evaluation of its contents” when there was a “serious conflict of opinion over the accounting treatment by Olympus at the time of audit for the fiscal year in March 2009”.

Current auditor, Ernst & Young ShinNihon is criticised for allegedly allowing to record as goodwill accounts that should have arouse doubts instead.  

“We cannot conclude this was appropriate”, the panel stated.

Finally, the overtake of the auditing from KPMG AZSA to Ernst & Young ShinNihon was criticised as “questionable” as it was considered as “nothing but a mere formality” and the two auditing firms “did not go so far as to touch the substantive reasons for such replacement”.

The Olympus scandal came to light after Michael Woodford, the ousted chief executive, prompted questions over excessive advisory payments of $687m it made in its 2008 acquisition of the UK medical equipment maker Gyrus, worth $2.2bn. M&A advisory fees are usually about 1% to 2% of a deal’s value.  

In spite of the questions over auditors’ behaviour, the independent panel who carried out the investigation urged in its report legal action against “rotten” executives saying that “Olympus should remove its malignant tumour and literally renew itself”.

Olympus has until 14 December 2011 to post its financial results and avoid automatic delisting.

 

 

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